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Our Metrology equipment (atomic force microscopes, or AFMs, stylus profilers, and optical interferometers) is used to provide critical surface measurements in research and production environments. In production, our equipment allows customers, such as those in semiconductor and data storage, to monitor their products throughout the manufacturing process in order to improve yields, reduce costs, and improve product quality. We also sell our broad line of AFMs, scanning probe microscopes ("SPMs"), optical interferometers, and stylus profilers to thousands of universities, research facilities, and scientific centers worldwide to enable a variety of nanotechnology related research.

Demand for many of our products has been driven by the increasing miniaturization of microelectronic components, the need for manufacturers to meet reduced time-to-market schedules while ensuring the quality of those components and, in the data storage industry, the introduction of tunneling magnetoresistive ("TMR") TFMHs and perpendicular recording technology which require additional manufacturing steps, new materials, and the ability to take critical measurements for quality control and yield management during the manufacturing process. The ability of our products to precisely deposit thin films, and/or etch sub-micron patterns and make critical surface measurements in these components enables manufacturers to improve yields and quality in the fabrication of advanced microelectronic devices. Veeco's core Process Equipment and Metrology technologies continue to find new applications for adoption across many technology applications.

Veeco was organized as a Delaware corporation in 1989.

Our Strategy

Our strategy for growth and improved profitability focuses on the following key activities:

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Increasing our research and development spending in end markets that we believe offer high growth opportunities;

â€˘
Maximizing our broad line of process equipment and metrology solutions to introduce new products which address customers' technology requirements and roadmaps;

â€˘
Improving the operational effectiveness and profitability of each of our product businesses;

We serve our worldwide customers through our global sales and service organization located throughout the United States, Europe, Japan, and Asia Pacific. At December 31, 2007, we had 1,216 employees, with manufacturing, research and development, and engineering facilities located in New York, Arizona, California, Colorado, Minnesota, and New Jersey.

Industry Background

General Introduction: Continued demand for smaller, faster, and less expensive microelectronic components, particularly in the consumer electronics industry, has led to increasing miniaturization of products. This miniaturization is achieved through an increased number of manufacturing steps involving greater use of precise etching and deposition equipment. In addition, metrology systems are used throughout the manufacturing process in order to monitor process accuracy, product quality, repeatability, and to measure critical dimensions and other physical features such as film thickness, line width, step height, sidewall angle, and surface roughness, thereby improving yields. Wireless components, semiconductor, and compound semiconductor devices, TFMHs, HB-LEDs, and other electronic components often consist of many intricate patterns on circuits or film layers. Depending upon the specific design of any given integrated circuit, a variety of film thicknesses, and a number of layers and film types will be used to achieve desired performance characteristics. Veeco's thin film deposition, etch and measurement technologies are applicable to broad technology applications in the data storage, HB-LED/wireless, solar and semiconductor industries as well as in scientific research. Current trends in each of these end markets are discussed below.

Trends in the Data Storage Industry: Worldwide storage demand continues to increase, driven by intelligent internet storage, e-commerce, e-mail, and new consumer applications now reaching higher volume. While much has been written about the competition HDDs face from flash memory, we believe that HDDs will continue to provide the best value for mass storage and will remain at the forefront of large capacity storage applications for years to come. In fact, the use of disk drives in many types of consumer applications has resulted in growth in the number of hard drive units shipped, which is expected to continue. According to data storage research firm IDC's 2007 report, consumer electronic applications of HDDs are forecasted to grow at a compound annual growth rate ("CAGR") of 9% from 2006 to 2011. In addition, we believe that the potential competition from flash will lead HDD manufacturers to continue to pursue advances in areal density (storage) in order to stay ahead on a price/performance basis. In August 2007, TrendFocus, a data storage research organization, forecasted that TFMH production will grow at a CAGR of approximately 6% from 2006 through 2011.

In order to satisfy market demand for devices with greater storage capacity, the data storage industry has developed new head designs by incorporating higher areal densities, which enable storage of more data. The capacity of disk drives is largely determined by the capability of the magnetic recording heads, which read and write signals onto hard disks. The data storage industry continues to fund the development of new high-density thin film head technology, increasing areal density by approximately 35% to 40% every year, according to industry analysts at IDC. The industry's move to perpendicular recording (PMR) in 2006 and 2007 allows hard drive manufacturers to put more bits of data on each square inch of disk space because of changes in the magnetic geometry. PMR requires thinner films, more layers, and more complicated process equipment and metrology solutions from companies such as Veeco.

While technology change continues in data storage, the industry is going through a period of vertical integration and consolidation that has led to capital constraint. In 2007, two of Veeco's key customers combined operations and another customer closed a large manufacturing facility. This caused a significant decline in Veeco's data storage revenues last year. As a result of this consolidation and evolving customer landscape, Veeco has taken several important actions to right-size our data storage businesses and product lines. We are refocusing our research and development and engineering efforts, have discontinued two product lines, and are consolidating facilities. We continue to maintain our commitment to our data storage customers and believe we are well-aligned to their technology requirements and demand for lower cost of ownership tools. We believe that one particular area of growth for us in 2008 and 2009 will be our customers' conversion to larger wafer sizes, which will require significant retooling.

Trends in the HB-LED/Wireless Industry: Veeco is a leading supplier of process equipment and metrology solutions used to create a broad range of compound semiconductor based devices such as mobile cell phones, wireless local area networks, and high-brightness blue/green/red/orange/yel low LEDs for applications such as general illumination and backlighting. We are the only supplier of both MOCVD and MBE systems, the two key epitaxial deposition technologies used for wireless, solar, and HB-LED applications. MOCVD and MBE technologies are used to grow compound semiconductor materials (such as GaAs (gallium arsenide), GaN (gallium nitride), As/P (arsenic phosphide) and InP (indium phosphide)) at the atomic scale. Epitaxy is the critical first step in compound semiconductor wafer fabrication and is considered to be the highest value added process, ultimately determining device functionality and performance. The combination of MOCVD and MBE increases our customer base and total available market, and provides us with unique market positioning opportunities.

Strategies Unlimited, an LED industry research organization, forecasts that the market for HB-LEDs will grow from $4.18 billion in 2006 to $9.40 billion in 2011, for a CAGR of 17.6%. LEDs are becoming increasingly more prevalent in automotive applications, flat panel displays, and other backlighting applications. We believe that the HB-LED market, while cyclical, represents a high-growth opportunity for Veeco due to the expanding applications for HB-LEDs, such as backlighting for large screen flat panel TVs (laser crystal diodesâ€”LCDs), automotive applications, and general illumination. While the overall HB-LED industry is forecasted to grow at nearly 18% annually as stated above, certain applications are forecasted to grow at higher rates. For example, LEDs for architectural and retail lighting are forecasted to grow nearly 40% over the next several years. The HB-LED/wireless portion of our business experienced the highest revenue growth rate of all of our businesses in both 2006 and 2007.

In order to gain market share in light of this growth opportunity, we have introduced several generations of MOCVD tools, most recently our TurboDiscÂ® K-Seriesâ„˘ MOCVD systems. By introducing new systems, we are focused on delivering better uniformity and repeatability, which helps our customers to make higher-brightness HB-LEDs. We also intend to continue to invest heavily in research and development and engineering in order to deliver more advanced MOCVD solutions to our customers. We remain optimistic about the growth opportunity resulting from providing enabling equipment to the HB-LED industry.
Trends in the Scientific Research and Industrial Industry: Our broad based research business has historically tracked the growth of the economy and Gross Domestic Product, as our equipment and instruments are used in a wide range of industrial applications. A meaningful trend in the research industry is the growth in nanotechnology investment occurring at the scientific and university level. Nanotechnology is the ability to design and control the structure of an object at all lengths from the atom up to the macro scale.

Nanoscience and nanotechnology have received significant funding from the U.S. government and other countries, and are beginning to impact many industries, including life sciences, data storage, semiconductor, telecommunications, and materials sciences. According to Lux Research Inc., global nanotechnology spending reached approximately $13 billion in 2007, consisting of a combination of government, industry, and venture capital funding. Our metrology instruments are used by nanotechnology researchers, and we currently sell to most major scientific and research organizations engaged in the field of nanotechnology. We continue to introduce new AFMs and SPMs to respond to the growing need for specialized scientific research metrology tools.

Trends in the Semiconductor Industry: Current semiconductor industry technology trends include smaller feature sizes (sub-0.10 micron line widths), larger substrates (i.e., 300 mm wafers), and the increased use of metrology in the manufacturing process. According to VLSI, a semiconductor research organization, the percentage of capital expenditures devoted to metrology tools by semiconductor manufacturers is a faster growing part of the equipment business. Semiconductor manufacturers use metrology tools in their wafer fabrication facilities to detect process deviations as early in the manufacturing process as possible. These tools are critical for yield enhancement resulting in cost reduction in this increasingly competitive environment.

We have sold over 450 automated AFM systems used in-line by manufacturers of semiconductor chips in their fabrication facilities. Our AFMs are used by all of the top 10 integrated device manufacturers worldwide. Our family of non-destructive AFM products includes our Vx Seriesâ„˘ Atomic Force Profilers, which combine AFM resolution with long-scan capability and are well-suited for chemical-mechanical planarization ("CMP") and etch depth measurements; our X3Dâ„˘ AFM for advanced lithography and photomask applications; and our DimensionÂ® X AFM for advanced etch measurements. In late 2007, we launched our next generation auto AFM tool, the InSightâ„˘ 3DAFM, the only metrology system available with the accuracy and precision required for non-destructive, high resolution three-dimensional ("3D") measurements of critical 45nm and 32nm semiconductor features, with the speed to qualify as a true fab tool. Veeco's InSight 3DAFM was designed specifically to address Critical Dimension ("CD"), depth and CMP metrology in a production environment. While the outlook for capital expenditures by semiconductor manufacturers in 2008 is currently not favorable, Veeco believes that this new tool offers a unique technology solution for its customers and will provide an avenue of potential growth for the Company.

CEO BACKGROUND

Nominated for
Re-Election to:

For a Term Expiring
at the Annual Meeting
of Stockholders in:

Joel A. Elftmann

Class II

2011

John R. Peeler

Class II

2011

Peter J. Simone

Class II

2011

MANAGEMENT DISCUSSION FROM LATEST 10K

Executive Summary

We design, manufacture, market, and service a broad line of equipment primarily used by manufacturers in the data storage, HB-LED, solar, wireless, and semiconductor industries. These industries help create a wide range of information age products such as computer integrated circuits, personal computers, LEDs for backlighting and automotive applications, HDDs, solar panels, network servers, digital cameras, wireless phones, digital video recorders, personal music/video players, and personal digital assistants. Our broad line of products features leading edge technology and allows customers to improve time-to-market of their next generation products. Our products also enable advancements in the growing fields of nanoscience, nanobiology, and other areas of scientific and industrial research.

Our Process Equipment products precisely deposit or remove (etch) various thin film materials in the manufacturing of TFMHs for the data storage industry, HB-LEDs, wireless devices (such as power amplifiers and laser diodes), solar panels, and semiconductor mask reticles. Our Metrology equipment is used to provide critical surface measurements in research and production environments. In production, our equipment allows customers, such as those in semiconductor and data storage, to monitor their products throughout the manufacturing process in order to improve yields, reduce costs, and improve product quality. We also sell our broad line of AFMs, SPMs, optical interferometers, and stylus profilers to thousands of universities, research facilities, and scientific centers worldwide to enable a variety of nanotechnology related research.

During 2007, management initiated and acted on a profit improvement plan, resulting in personnel severance costs for approximately 7.5% of our employees, a reduction of discretionary expenses, realignment of our sales organization to more closely match current market and regional opportunities, and consolidation of certain engineering groups within our data storage business, which included the discontinuation of two products. In conjunction with these activities, we recognized a restructuring charge of approximately $6.7 million during the year ended December 31, 2007, as well as an inventory write-off of $4.8 million and an asset impairment charge of $1.1 million.

Summary of Results for 2007

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Revenue decreased 8.7% to $402.5 million from $441.0 million in 2006. We experienced a decline in sales in the data storage and semiconductor markets of 25.3% and 34.8%, respectively; however, this was partially offset by strong growth in the HB-LED/wireless market, representing a 25.2% increase from 2006;

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Our 2007 sales by segment were $252.0 million from Process Equipment and $150.5 million from Metrology, down 6.3% and 12.6%, respectively, from 2006;

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Orders were $451.6 million in 2007, down from $493.8 million in 2006;

Operating Expenses

Selling, general and administrative expenses decreased by $2.1 million, primarily attributable to a decrease in bonus, profit sharing, and commission expenses related to the reduction in domestic sales, as well as reduced legal fees. The decrease was offset by an increase in non-cash compensation expense related to stock options and restricted shares, and an increase in executive stay and sign-on bonuses. Selling, general and administrative expenses were 22.6% of sales in 2007, compared with 21.1% of sales in the prior year period.

Research and development expense decreased $0.8 million from the comparable prior year period, primarily due to prior year product development efforts for Process Equipment products that were introduced during 2007. As a percentage of sales, research and development expense increased to 15.2% from 14.0% in the prior year period.

Amortization expense decreased by $5.8 million from the prior year due to certain technology-based intangibles becoming fully amortized during 2007.

Restructuring expense of $6.7 million for the year ended December 31, 2007 was principally a result of personnel severance costs of $4.9 million associated with a cost reduction plan initiated by management during 2007. Additionally, we incurred $1.8 million of costs for purchase commitments associated with certain discontinued product lines. No such restructuring expenses were recorded in the prior year period.

Asset impairment charges of $1.1 million incurred during 2007 were attributable to the write-off of certain property and equipment associated with the discontinued product lines. No such asset impairment charges were recorded in the prior year period.

During the third quarter of 2006, we finalized the purchase accounting for our acquisition of 19.9% of the stock of Fluens, and determined that Fluens is a variable interest entity and that we are its primary beneficiary. Approximately 31% of Fluens is owned by a Senior Vice President of our Company. As such, we have consolidated the results of Fluens' operations from the acquisition date, and have attributed the 80.1% portion that is not owned by Veeco to noncontrolling interest in our consolidated financial statements. As part of this acquisition accounting, we recorded $1.2 million of in-process technology, which was written off during the third quarter of 2006. No such costs were recorded during 2007.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Executive Summary

We design, manufacture, market, and service enabling solutions for customers in the HB-LED, solar, data storage, semiconductor, scientific research and industrial markets. We have leading technology positions in our three businesses: LED & Solar Process Equipment, Data Storage Process Equipment, and Metrology.

Our LED & Solar Process Equipment products, which include MOCVD and MBE technologies, and web coaters for flexible photovoltaic applications, are used in the manufacturing of HB-LEDs and wireless devices (such as power amplifiers) and solar panels. Our Data Storage Process Equipment products, which include ion beam etch and deposition, physical vapor deposition and other technologies, are used primarily in the manufacturing of TFMHs for the data storage industry. Our Metrology equipment includes atomic force microscopes (â€śAFMsâ€ť), scanning probe microscopes (â€śSPMsâ€ť), optical interferometers, and stylus profilers, and is used to provide critical surface measurements in research and production environments. In production, our equipment allows customers, such as those in semiconductor and data storage, to monitor their products throughout the manufacturing process in order to improve yields, reduce costs, and improve product quality. Our instruments are also sold to thousands of universities, research facilities and scientific centers worldwide to enable a variety of nanotechnology related research.

We currently maintain facilities in Arizona, California, Colorado, Minnesota, New Jersey, New York, and Massachusetts, with sales and service locations in North America, Europe, Japan, and the Asia Pacific region.

During 2007, management established a profit improvement plan, resulting in a 7.5% reduction in our employment levels, a reduction of discretionary expenses, the realignment of our sales organization to match more closely market and regional opportunities, consolidation of our Corporate headquarters, and the consolidation of certain engineering groups within our Data Storage Process Equipment business, which included the discontinuation of two products. In conjunction with these activities, we recognized a restructuring charge of approximately $6.7 million during the year ended December 31, 2007, as well as an inventory write-off of $4.8 million and an asset impairment charge of $1.1 million. During the nine months ended September 30, 2008, we incurred additional restructuring charges of $7.0 million and asset impairment charges of $0.3 million, discussed further in Results of Operations below. Through the first nine months of 2008, we have seen the positive impact of these restructuring activities on the Companyâ€™s operating expenses.

Highlights of the Third Quarter of 2008

â€˘Revenue was $115.7 million, an 18% increase over the third quarter of 2007.

â€˘Orders were $90.2 million, down 24% from the third quarter of 2007.

â€˘ Net loss was ($1.7) million, or ($0.05) per share, compared to net loss of ($5.7) million, or ($0.18) per share, in the third quarter of 2007.

â€˘Gross margins were 39.8%, compared to 36.7% in the third quarter of 2007.

Highlights of the First Nine Months of 2008

â€˘Revenue was $332.5 million, a 12% increase over the comparable 2007 period.

â€˘Net income was $0.9 million, or $0.03 per share, compared to a net loss of ($8.0) million, or ($0.26) per share, in the comparable 2007 period.

â€˘Gross margins were 41.0%, compared to 41.2% in 2007.

Outlook

For the first nine months of 2008, the Company has reported a meaningful recovery year in both revenue growth and profitability. While Veeco has delivered strong revenue growth and profit improvement in 2008, in the third quarter we experienced a deterioration in business conditions with a sharp decline in orders of MOCVD systems as the HB-LED industry digests the significant number of new tools purchased this past year, and the global credit crisis caused customers to delay or forego capacity and technology purchases. Third quarter orders of $90.2 million were significantly below our prior expectations, and the Company also experienced some push-outs and cancellations of equipment purchases.

While the Company has a healthy prospect list for new orders in the fourth quarter, it appears that the global economic climate and constrained financing environment may cause a broad slowdown in capital equipment purchases by our customers, with uncertainty as to the depth and duration of the downturn. Due to this limited visibility, we are unable to give an accurate assessment of fourth quarter orders, and we currently anticipate order rates to come under pressure for the foreseeable future. Veeco estimates that its revenues for the fourth quarter of 2008 will be $110-$118 million.

The Company is taking corrective actions to lower our cost structure in preparation for what is likely to be a reduced revenue year in 2009. Our goal is to lower our spending while maintaining strategic investments in research and development, particularly in our LED & Solar business. It is our intent to emerge from the present economic environment in a strong position to enable future revenue and profit growth. Since the Company is currently evaluating various cost cutting actions, it is likely that Veeco will incur restructuring charges in the fourth quarter, depending upon the timing and extent of actions under consideration. We are not able to estimate the extent of these charges at this time.

Despite the recent deteriorating business conditions, Veeco has forecasted revenues in the range of $440 to $450 million in 2008, up approximately 10% from the $402.5 million reported in 2007, as well as a meaningful profit improvement as compared to 2007. The Company believes that it is well-positioned to capitalize on exciting multi-year technology trends across our LED & Solar, Data Storage and Metrology businesses, and we have made significant progress this year in refocusing our businesses and improving our performance. We have a strong balance sheet and positive cash flow, and we expect at this time that we can manage Veeco through the global economic crisis while maintaining our commitment to R&D to ensure our long-term growth and success.

Results of Operations:

Three Months Ended September 30, 2008 and 2007

Consistent with prior years, we report interim quarters, other than fourth quarters, which always end on December 31, on a 13-week basis ending on the last Sunday within such period. The interim quarter ends are determined at the beginning of each year based on the 13-week quarters. The 2008 interim quarter ends are March 30, June 29 and September 28. The 2007 interim quarter ends were April 1, July 1 and September 30. For ease of reference, we report these interim quarter ends as March 31, June 30, and September 30 in our interim condensed consolidated financial statements acquisition. Additionally, Data Storage Process Equipment sales were up 39.1%, primarily as a result of customersâ€™ technology and capacity requirements. These increases were partially offset by a decrease in Metrology sales of 9.6%, primarily due to a slowdown in the semiconductor and research and industrial markets. By region, net sales increased by 34.0%, 56.6% and 10.0% in North America, Europe, and Asia Pacific, respectively, and decreased by 47.5% in Japan. We believe that there will continue to be quarter-to-quarter variations in the geographic distribution of sales.

Orders for the third quarter of 2008 decreased by 23.8% from the comparable 2007 period. By segment, the 47.1% decrease in orders for LED & Solar Process Equipment was a result of the HB-LED industryâ€™s slower absorption of the significant number of new MOCVD tools purchased during the past two years. Additionally, the global credit crisis has caused customers to delay or forego capacity and technology purchases. The 14.4% decrease in Metrology orders was due to decreased orders for AFM products due to lower demand in the semiconductor and research and industrial markets. Data Storage Process Equipment orders remained flat when compared to the 2007 period.

Our book-to-bill ratio for the third quarter of 2008, which is calculated by dividing orders received in a given time period by revenue recognized in the same time period, was 0.78 to 1. Our backlog as of September 30, 2008 was $176.0 million, compared to $173.5 million as of December 31, 2007. During the quarter ended September 30, 2008, we experienced a decrease in backlog of $9.7 million primarily from order cancellations. The outlook for orders in the fourth quarter is uncertain, and it appears that the global economic climate and constrained financing environment may cause a broad slowdown in capital equipment purchases by our customers. Due to these changing business conditions and weak capital equipment spending by customers in our business, as well as the global credit crisis, we expect to experience continued volatility in the form of cancellations and/or rescheduled orders.

Gross Profit

Gross profit for the quarter ended September 30, 2008, was 39.8%, compared to 36.7% in the third quarter of 2007 primarily due to strong performance in Process Equipment. Data Storage Process Equipment gross margins increased from 33.5% in the prior-year period to 39.8%, primarily from an increase in sales volume due to increased capacity spending, a favorable product mix and favorable pricing when compared to the prior comparable period, and cost reductions resulting from managementâ€™s profit improvement plan, introduced in the fourth quarter of 2007. LED & Solar Process Equipment gross margins increased from 33.4% in the prior-year period to 36.0%, primarily due to an increase in sales volume, as well as a favorable product mix, as compared to the prior-year period. The current-year period includes a reduction in gross profit of $0.9 million related to the acquisition of Mill Lane. This reduction was the result of purchase accounting, which requires adjustments to capitalize inventory at fair value. This impact is reflected in cost of sales. Metrology gross margins increased from 42.6% in the prior year period to 44.9%, despite a reduction in sales volume, principally due to a richer product mix, as well as a reduction in costs.

Operating Expenses

Selling, general and administrative expenses increased by $0.9 million, or 3.8%, from the prior-year period primarily due to increased bonus incentives as a result of improved profitability, and an increase in non-cash compensation expense related to stock options and shares of restricted stock. These increases were partially offset by reductions in consulting services and travel and entertainment expense resulting from our cost reduction efforts. As a percentage of sales, selling, general and administrative expenses decreased from 23.3% in the third quarter of 2007 to 20.4% in the third quarter of 2008.

Research and development expense increased $0.3 million from the third quarter of 2007, primarily due to research efforts in LED & Solar Process Equipment. As a percentage of sales, research and development decreased from 15.4% in the third quarter of 2007 to 13.2% in the third quarter of 2008.

Amortization expense increased by $1.2 million, or 60.7% from the third quarter of 2007, due primarily to amortization of intangible assets acquired as part of the acquisition of Mill Lane in the second quarter of 2008.

Restructuring expense of $4.1 million in the third quarter of 2008 consisted of $3.7 million associated with the acceleration of equity awards and other severance costs resulting from the mutually agreed upon termination of the employment agreement of our former CEO, as well as $0.4 million for severance and lease-related charges in Metrology. Restructuring expense of $0.5 million in the third quarter of 2007 consisted of personnel severance costs incurred across all divisions.

Interest Expense, Net

Net interest expense in the third quarter of 2008 was $1.1 million, compared to $0.7 million in the third quarter of 2007. The increase in net interest expense is due to a reduction in interest income resulting primarily from lower interest rates during the current period.

Income Taxes

Income tax provision for the quarter ended September 30, 2008 was $0.8 million, compared to $1.0 million in the third quarter of 2007. The 2008 provision for income taxes included $0.5 million relating to our foreign operations which continue to be profitable, and $0.3 million relating to our domestic operations. The 2007 provision for income taxes included $0.6 million relating to our foreign operations and $0.4 million relating to our domestic operations.

By segment, LED & Solar Process Equipment sales were up 56.0% due to an increase in end user demand from expanding applications for HB-LEDs, as well as strong customer acceptance of Veecoâ€™s newest generation systems. Additionally, Data Storage Process Equipment sales increased by 5.3% due to customersâ€™ technology and capacity requirements. This was partially offset by a decrease in Metrology sales of 12.6%, primarily due to a slowdown in the semiconductor and research and industrial markets. By region, net sales increased by 22.1%, 30.8% and 13.2% in North America, Europe, and Asia Pacific, respectively, and decreased by 32.9% in Japan. We believe that there will continue to be quarter-to-quarter variations in the geographic distribution of sales.

Orders for the nine-month period ended September 30, 2008 were essentially flat with the comparable 2007 period. By segment, the 13.4% decrease in Metrology orders was due to decreased orders for AFM products resulting from lower demand in the semiconductor, research, and industrial markets. The 4.1% decrease in orders for LED & Solar Process Equipment was due primarily to the third quarter 2008 decline in MOCVD orders as the HB-LED industry absorbs the significant number of new MOCVD tools purchased in the past two years. These decreases are principally offset by a 17.8% increase in Data Storage Process Equipment orders, primarily for slicing and dicing products used to create TFMHs.

Our book-to-bill ratio for the nine months ended September 30, 2008 was 1.01 to 1. Our backlog as of September 30, 2008 was $176.0 million, compared to $173.5 million as of December 31, 2007. During the nine months ended September 30, 2008, we experienced an increase in backlog of $12.7 million due to the acquisition of Mill Lane, offset by order cancellations of $13.7 million. The outlook for orders in the fourth quarter is uncertain, and it appears that the global economic climate and constrained financing environment may cause a broad slowdown in capital equipment purchases by our customers. Due to these changing business conditions and weak capital equipment spending by customers in our businesses, as well as the global credit crisis, we expect to experience continued volatility in the form of cancellations and/or rescheduled orders.

Gross Profit

Gross profit for the nine months ended September 30, 2008, was 41.0%, compared to 41.2% in the comparable 2007 period. Strong performance in Process Equipment due primarily to an increase in sales volume was offset primarily by unfavorable sales volume in Metrology. LED & Solar Process Equipment gross margins increased from 37.0% in the prior-year period to 39.6%, primarily due to a significant overall increase in sales volume as compared to the prior-year period as well as favorable pricing on new MOCVD products and a favorable product mix in MBE products. The current-year period includes a reduction in gross profit of $0.9 million related to the acquisition of Mill Lane. The reduction was the result of purchase accounting, which requires adjustments to capitalize inventory at fair value. This impact is reflected in cost of sales. Data Storage Process Equipment gross margins decreased from 39.5% in the prior-year period to 38.9%, due to favorable warranty and pricing in the prior-year period. Metrology gross margins decreased from 45.6% in the prior-year period to 45.2%, principally due to lower sales volume offset by a reduction in spending and favorable product mix.

Operating Expenses

Selling, general and administrative expenses increased by $1.2 million, or 1.7%, from the prior-year period primarily due to increased bonus incentives and profit sharing as a result of better profitability performance, as well as an increase in non-cash compensation expense related to stock options and shares of restricted stock. This was partially offset by reductions in travel and entertainment expense and consulting services associated with our cost reduction initiatives. As a percentage of sales, selling, general and administrative expenses decreased from 23.4% in 2007 to 21.2% in 2008.

Research and development expense decreased $1.2 million from the comparable 2007 period, primarily due to a more focused approach to data storage product development as a result of the decision made in the fourth quarter of 2007 by management to discontinue two product lines and consolidate facilities to better reflect the volume of business and industry growth rates. As a percentage of sales, research and development decreased from 15.7% in 2007 to 13.6% in 2008.

Amortization expense was $7.5 million in the 2008 period, compared to $8.2 million in 2007. The decrease was the result of certain technology-based intangible assets becoming fully amortized, offset by the amortization in the current period of intangibles acquired as part of the acquisition of Mill Lane.

During the nine months ended September 30, 2008, we recorded restructuring charges of $7.0 million, of which $4.1 million was incurred during the third quarter of 2008 and $2.9 million was incurred during the first quarter of 2008. The third quarter restructuring charge consists of $3.7 million associated with the acceleration of equity awards and other severance costs resulting from the mutually agreed upon termination of the employment agreement of our former CEO, as well as $0.4 million for severance and lease-related charges in Metrology. The first quarter restructuring charge consisted of $2.6 million of costs associated with the consolidation and relocation of our Corporate headquarters and $0.3 million of personnel severance costs. Restructuring expense in 2007 of $2.0 million consisted of personnel severance costs.

An asset impairment charge of $0.3 million was taken during 2008 primarily for leasehold improvements and furniture and fixtures abandoned in connection with the consolidation and relocation of our Corporate headquarters into our Plainview, New York facility during the first quarter. No similar expense was incurred in the prior-year period.

Interest Expense, Net

Net interest expense in the nine-month period ended September 30, 2008 was $2.9 million, compared to $2.3 million in the comparable 2007 period. This increase in net interest expense was due to a reduction in interest income resulting from lower interest rates.

Gain on Extinguishment of Debt

During the first quarter of 2007, we repurchased $56.0 million of our convertible subordinated notes, reducing the amount outstanding from $200.0 million to $144.0 million. The repurchase amount was $55.1 million in cash, of which $54.8 million related to principal and $0.3 million related to accrued interest. As a result of these repurchases, we recorded a net gain from the extinguishment of debt in the amount of $0.7 million in 2007.

Income Taxes

Income tax provision for the nine months ended September 30, 2008 was $2.9 million compared to $3.5 million in the comparable prior-year period, primarily as a result of a $0.4 million decrease in the reserve relating to foreign unrecognized tax benefits as required by FASB Interpretation Number 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (â€śFIN 48â€ť). The 2008 provision for income taxes included $1.9 million relating to our foreign operations which continue to be profitable, and $1.0 million relating to our domestic operations. The 2007 provision for income taxes included $2.5 million relating to our foreign operations and $1.0 million relating to our domestic operations.

We had a net increase in cash of $0.6 million during the nine months ended September 30, 2008. Cash provided by operations was $22.4 million for this period, as compared to $22.8 million for the comparable 2007 period. Net income adjusted for non-cash items provided operating cash flows of $29.0 million for the nine months ended September 30, 2008. Net cash provided by operations for the nine months ended September 30, 2008 was negatively impacted by a net change in net operating assets and liabilities of $6.6 million. This was driven by a decrease in accounts payable and accrued expenses of approximately $9.6 million and an increase of $2.0 million in capitalized patent costs, partially offset by a decrease in accounts receivable of $6.6 million. Due to the current global economic crisis, we cannot assure timely receipts of accounts receivable, due to cash constraints on our customers. As of September 30, 2008, we are not aware of any specific uncollectible accounts resulting from the current economic uncertainties and believe that related reserves are adequate to cover the uncertainties that exist.

Cash used in investing activities of $21.3 million for the nine months ended September 30, 2008 resulted from the acquisition of Mill Lane, net of cash acquired, for $11.0 million, as well as capital expenditures of $10.4 million. During the fourth quarter of 2008, we expect to invest an estimated additional $4.2 million in capital projects primarily related to engineering equipment and lab tools used in producing, testing and process development of our products and enhanced manufacturing facilities. Cash used in investing activities of $6.5 million for the nine months ended September 30, 2007 resulted primarily from capital expenditures of $6.8 million, partially offset by $0.3 million in proceeds from the sale of property, plant, and equipment.

Cash used in financing activities for the nine months ended September 30, 2008 totaled $0.6 million, resulting from $1.0 million in restricted stock tax withholdings and $0.3 million in mortgage payments, offset by proceeds of $0.7 million from common stock issuances resulting from stock option exercises. Cash used in financing activities for the nine months ended September 30, 2007 totaled $54.4 million, primarily consisting of $55.4 million used to repurchase a portion of our outstanding convertible subordinated notes (discussed below) and $1.5 million in payments for debt issuance costs, partially offset by $2.8 million from the issuance of common stock resulting from the exercise of employee stock options.

During the first quarter of 2007, we repurchased $56.0 million of our 4.125% convertible subordinated notes due 2008 (the â€śOld Notesâ€ť), for $55.1 million (including accrued interest) in cash which reduced the amount of Old Notes outstanding from $200.0 million to $144.0 million. As a result of these repurchases, we recorded a net gain of $0.7 million. We may engage in similar transactions in the future depending on market conditions, our cash position and other factors.

During the s econd quarter of 2007, we issued new convertible subordinated notes due 2012 (the â€śNew Notesâ€ť) pursuant to privately negotiated exchange agreements with certain holders of the Old Notes. Under these agreements, such holders agreed to exchange $118.8 million aggregate principal amount of the Old Notes for approximately $117.8 million aggregate principal amount of New Notes due April 15, 2012. No net gain or loss was recorded on the exchange transactions since the carrying value of the Old Notes including unamortized deferred financing costs approximated the exchange value of the New Notes. Following the exchange transactions, approximately $25.2 million of the Old Notes remained outstanding and are due in December 2008. We expect to pay off these Old Notes through the use of our available cash balances.

The New Notes initially are convertible into 36.7277 shares of common stock per $1,000 principal amount of New Notes at a conversion price of $27.23 at any time during the period beginning on January 15, 2012 through the close of business on the second day prior to April 15, 2012 and earlier upon the occurrence of certain events. We pay interest on the New Notes on April 20 and October 15 of each year.

During the third quarter of 2007, we entered into the Credit Agreement with HSBC Bank, as administrative agent. The Credit Agreement provides for borrowings of up to $100.0 million with an annual interest rate that is a floating rate equal to the prime rate of the agent bank. A LIBOR-based interest rate option is also provided. Borrowings may be used for general corporate purposes, including working capital requirements and acquisitions. The Credit Agreement contains certain restrictive covenants, and we are required to satisfy certain financial tests under the Credit Agreement. As of September 30, 2008, we are in compliance with all covenants. Substantially all of our domestic assets, other than real estate, have been pledged to secure our obligations under the New Credit Agreement. The revolving credit facility under the New Credit Agreement expires on March 31, 2012. As of September 30, 2008 and December 31, 2007, there were no borrowings or unsecured letters of credit outstanding. Since borrowing availability under the Credit Agreement is based upon earnings, the anticipated business downturn may have an impact on our borrowing availability and could potentially result in noncompliance with the restrictive covenants required by the Credit Agreement.

We believe that existing cash balances together with cash generated from operations and amounts available under the Credit Agreement will be sufficient to meet our projected working capital and other cash flow requirements for the next twelve months, as well as our contractual obligations. We believe we will be able to meet our obligation to repay the $25.2 million outstanding Old Notes that mature on December 21, 2008 through the use of available cash, and to repay the $117.8 million outstanding New Notes that mature on April 15, 2012 through a combination of conversion of the notes outstanding, refinancing, cash generated from operations, and other means.

During the second quarter of 2008, we acquired Mill Lane for $11.0 million, net of cash acquired, plus potential future earn-out payments of up to $19.0 million, contingent upon the future achievement of certain operating performance criteria. As of September 30, 2008, we have accrued $3.5 million in earn-out payments due to revenues earned through the end of the third quarter of 2008, and we anticipate accruing approximately $6.1 million during the fourth quarter of 2008. Payment for these earn-outs will be made in the first quarter of 2009. We believe we will be able to meet our obligation to pay these earn-out amounts to Mill Lane from the sources referred to above.

In 2006, we invested $0.5 million to purchase 19.9% of the common stock of Fluens Corporation (â€śFluensâ€ť), of which 31% is owned by one of our Senior Vice Presidents. Veeco and Fluens have jointly developed a next-generation process for high-rate deposition of aluminum oxide for data storage applications. If this development is successful and upon the satisfaction of certain additional conditions by May 2009, we will be obligated to purchase the balance of the outstanding stock of Fluens for $3.5 million plus an earn-out payment to Fluensâ€™ stockholders based on future performance.

Application of Critical Accounting Policies

General: Our discussion and analysis of our financial condition and results of operations are based upon our Condensed Consolidated Financial Statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an on-going basis, management evaluates its estimates and judgments, including those related to bad debts, inventories, intangible assets and other long-lived assets, income taxes, warranty obligations, restructuring costs and contingent liabilities, including potential litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We consider certain accounting policies related to revenue recognition, the valuation of inventories, the impairment of goodwill and indefinite-lived intangible assets, the impairment of long-lived assets, warranty costs, the accounting for income taxes, and share-based compensation to be critical policies due to the estimation processes involved in each.

Revenue Recognition: We recognize revenue in accordance with the SEC Staff Accounting Bulletin No. 104, Revenue Recognition . Certain of our product sales are accounted for as multiple-element arrangements in accordance with Emerging Issues Task Force (â€śEITFâ€ť) 00-21, Revenue Arrangements with Multiple Deliverables. A multiple-element arrangement is a transaction which may involve the delivery or performance of multiple products, services, or rights to use assets, and performance may occur at different points in time or over different periods of time. We recognize revenue when persuasive evidence of an arrangement exists, the sales price is fixed or determinable and collectability is reasonably assured. For products produced according to our published specifications, where no installation is required or installation is deemed perfunctory and no substantive customer acceptance provisions exist, revenue is recognized when title passes to the customer, generally upon shipment. For products produced according to a particular customerâ€™s specifications, revenue is recognized when the product has been tested, it has been demonstrated that it meets the customerâ€™s specifications and title passes to the customer. The amount of revenue recorded is reduced by the amount of any customer retention (generally 10% to 20%), which is not payable by the customer until installation is completed and final customer acceptance is achieved. Installation is not deemed to be essential to the functionality of the equipment since installation does not involve significant changes to the features or capabilities of the equipment or building complex interfaces and connections. In addition, the equipment could be installed by the customer or other vendors and generally the cost of installation approximates only 1% to 2% of the sales value of the related equipment. For new products, new applications of existing products, or for products with substantive customer acceptance provisions where performance cannot be fully assessed prior to meeting customer specifications at the customer site, revenue is recognized upon completion of installation and receipt of final customer acceptance. Since title to goods generally passes to the customer upon shipment and 80% to 90% of the contract amount becomes payable at that time, inventory is relieved and accounts receivable is recorded for the amount billed at the time of shipment. The profit on the amount billed for these transactions is deferred and recorded as deferred profit in the accompanying condensed consolidated balance sheets. Service and maintenance contract revenues are recorded as deferred revenue, which is included in other accrued expenses, and recognized as revenue on a straight-line basis over the service period of the related contract.

Inventory Valuation: Inventories are stated at the lower of cost (principally first-in, first-out method) or market. Management evaluates the need to record adjustments for impairment of inventory on a quarterly basis. Our policy is to assess the valuation of all inventories, including raw materials, work-in-process, finished goods and spare parts. Obsolete inventory or inventory in excess of managementâ€™s estimated usage for the next 12 monthâ€™s requirements is written down to its estimated market value, if less than its cost. Inherent in the estimates of market value are managementâ€™s estimates related to our future manufacturing schedules, customer demand, technological and/or market obsolescence, possible alternative uses and ultimate realization of excess inventory.

Goodwill and Indefinite-Lived Intangible Asset Impairment: We have significant intangible assets related to goodwill and other acquired intangibles. In assessing the recoverability of our goodwill and other indefinite-lived intangible assets, we must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. If it is determined that impairment indicators are present and that the assets will not be fully recoverable, their carrying values are reduced to estimated fair value. Impairment indicators include, among other conditions, cash flow deficits, an historic or anticipated decline in revenue or operating profit, adverse legal or regulatory developments, and a material decrease in the fair value of some or all of the assets. Assets are grouped at the lowest levels for which there are identifiable cash flows that are largely independent of the cash flows generated by other asset groups. Changes in strategy and/or market conditions could significantly impact these assumptions, and thus Veeco may be required to record impairment charges for those assets not previously recorded. During the fourth quarter of 2007, as required, we performed an annual impairment test, and based upon the judgment of management, it was determined that no impairment exists. Management continues to believe that there are no impairment indicators at the current time.

Long-Lived Asset Impairment: The carrying values of long-lived assets are periodically reviewed to determine if any impairment indicators are present. If it is determined that such indicators are present and the review indicates that the assets will not be fully recoverable, based on undiscounted estimated cash flows over the remaining amortization or depreciation period, the carrying values of such assets are reduced to estimated fair value. Impairment indicators include, among other conditions, cash flow deficits, an historic or anticipated decline in revenue or operating profit, adverse legal or regulatory developments, and a material decrease in the fair value of some or all of the assets. Assets are grouped at the lowest level for which there is identifiable cash flows that are largely independent of the cash flows generated by other asset groups. Assumptions utilized by management in reviewing for impairment of long-lived assets could be effected by changes in strategy and/or market conditions which may require us to record additional impairment charges for these assets, as well as impairment charges on other long-lived assets not previously recorded.

Warranty Costs: We estimate the costs that may be incurred under the warranty we provide and record a liability in the amount of such costs at the time the related revenue is recognized. Estimated warranty costs are determined by analyzing specific product and historical configuration statistics and regional warranty support costs. Our warranty obligation is affected by product failure rates, material usage and labor costs incurred in correcting product failures during the warranty period. As our customer engineers and process support engineers are highly trained and deployed globally, labor availability is a significant factor in determining labor costs. The quantity and availability of critical replacement parts is another significant factor in estimating warranty costs. Unforeseen component failures or exceptional component performance can also result in changes to warranty costs. If actual warranty costs differ substantially from our estimates, revisions to the estimated warranty liability would be required.

Income Taxes: As part of the process of preparing our Consolidated Financial Statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating the actual current tax expense, together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our Condensed Consolidated Balance Sheets. The carrying value of our deferred tax assets is adjusted by a valuation allowance to recognize the extent to which the future tax benefits will be recognized on a more likely than not basis. Our net deferred tax assets consist primarily of net operating loss and tax credit carryforwards, and timing differences between the book and tax treatment of inventory and other asset valuations. Realization of these net deferred tax assets is dependent upon our ability to generate future taxable income.

We record valuation allowances in order to reduce our deferred tax assets to the amount expected to be realized. In assessing the adequacy of recorded valuation allowances, we consider a variety of factors, including the scheduled reversal of deferred tax liabilities, future taxable income, and prudent and feasible tax planning strategies. Under Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (â€śSFAS 109â€ť), factors such as current and previous operating losses are given significantly greater weight than the outlook for future profitability in determining the deferred tax asset carrying value.

At September 30, 2008, we had a valuation allowance of approximately $68.0 million against substantially all of our domestic net deferred tax assets, which consist of net operating loss and tax credit carryforwards, as well as temporary deductible differences. The valuation allowance was calculated in accordance with the provisions of SFAS 109, which places primary importance on our historical results of operations. Although our operating results in prior years were significantly affected by restructuring and other charges, our historical losses and the loss incurred in 2007 represent negative evidence sufficient to require a full valuation allowance under the provisions of SFAS 109. If we are able to realize part or all of the deferred tax assets in future periods, we will reduce our provision for income taxes with a release of the valuation allowance in an amount that corresponds with the income tax liability generated.

In July 2006, the FASB issued FIN 48, which became effective for us on January 1, 2007. FIN 48 addresses the determination of how tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN 48, we must recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained under examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such uncertain tax positions are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution.

Share-Based Compensation: We account for our share-based compensation in accordance with SFAS 123(R). SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Additionally, SFAS No. 123(R) requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under previous accounting literature, which has the effect of reducing consolidated net operating cash flows and increasing consolidated net financing cash flows in periods after adoption. For the nine months ended September 30, 2008, we did not recognize any consolidated financing cash flows for such excess tax deductions.

Under SFAS 123(R), we are required to record the fair value of stock-based compensation awards as an expense. In order to determine the fair value of stock options on the grant date, we apply the Black-Scholes option-pricing model. Inherent in the model are assumptions related to expected stock-price volatility, option life, risk-free interest rate and dividend yield. While the risk-free interest rate and dividend yield are less subjective assumptions, typically based on factual data derived from public sources, the expected stock-price volatility and option life assumptions require a level of judgment which make them critical accounting estimates. We use an expected stock-price volatility assumption that is a combination of both historical and implied volatilities of the underlying stock, which is obtained from public data sources. We consider the exercise behavior of past grants and model the pattern of aggregate exercises in determining the expected weighted-average option life.

Recent Accounting Pronouncements

On February 12, 2008, the FASB issued FSP 157-2. FSP 157-2 amends SFAS 157 to delay the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (that is, at least annually). For items within its scope, FSP 157-2 defers the effective date of SFAS 157 to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. Currently we believe the impact of the adoption of FSP 157-2 in 2009 will be on our disclosures only.

In December 2007, the FASB issued SFAS 141(R) and SFAS 160. Under SFAS 141(R), an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition date at fair value with limited exceptions. SFAS 141(R) also changes the accounting treatment for certain other items that relate to business combinations. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after January 1, 2009. The purpose of SFAS 160 is to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements. The most significant provisions of this statement result in changes to the presentation of noncontrolling interests in the consolidated financial statements. SFAS 160 is effective for fiscal years beginning after December 15, 2008. The adoption of this statement will impact the manner in which we present noncontrolling interests, but will not impact our consolidated financial position or results of operations.

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities (â€śSFAS 161â€ť). SFAS 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities , and its related interpretations, and (c) how derivative instruments and related hedged items affect an entityâ€™s financial position, financial performance, and cash flows. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008 and requires comparative disclosures only for periods subsequent to initial adoption. The adoption of the provisions of SFAS 161 will not impact our consolidated financial position or results of operations.

In May 2008, the FASB issued FSP APB 14-1. The guidance is effective for fiscal years beginning after December 15, 2008 and interim periods within those years. FSP APB 14-1 will require issuers of convertible debt that can be settled in cash to separately account for (i.e. bifurcate) a portion of the debt associated with the conversion feature and reclassify this portion to stockholdersâ€™ equity. The liability portion, which represents the fair value of the debt without the conversion feature, will be accreted to its face value over the life of the debt using the effective interest method, with the accretion expense recorded to interest. FSP APB 14-1 will be applied retrospectively to all periods presented. The cumulative effect of the change in accounting principle on periods prior to those presented will be recognized as of the beginning of the first period presented. We expect the adoption of FSP APB 14-1 to have a material effect on our consolidated financial position, results of operations, and earnings per share. Effective as of the date of issuance of the New Notes, we will reclassify approximately $16.3 million from long-term debt to additional paid-in capital, and as of the adoption of FSP APB 14-1 in the beginning of 2009, our accumulated deficit will reflect approximately $4.8 million of debt accretion that occurred between the issuance date of the New Notes and the adoption date. Approximately $3.2 to $3.7 million of additional interest expense will be recorded annually from the adoption date through the maturity date of the convertible debt. This additional interest expense will not require the use of cash.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Our net sales to foreign customers represented approximately 66.4% and 64.9%, respectively, of our total net sales for the three months and nine months ended September 30, 2008, and 70.3% and 67.7%, respectively, for the comparable 2007 periods. We expect that net sales to foreign customers will continue to represent a large percentage of our total net sales. Our net sales denominated in foreign currencies represented approximately 13.2% and 13.9% of our total net sales for the three months and nine months ended September 30, 2008, respectively, and 21.1% and 20.7%, respectively, for the comparable 2007 periods.

The condensed consolidated results of operations for the three months and nine months ended September 30, 2008 include aggregate foreign currency gains of less than $0.1 million and $0.1 million, respectively, which were net of losses of approximately $0.1 million and $0.3 million, respectively, related to forward contracts. For the three months and nine months ended September 30, 2007, the results included aggregate foreign currency losses of less than $0.1 million and approximately $0.3 million, respectively, which included gains of less than $0.1 million and losses of approximately $0.1 million, respectively, related to forward contracts.

We are exposed to financial market risks, including changes in foreign currency exchange rates. The changes in currency exchange rates that have the largest impact on translating our international operating profit are the Japanese Yen and the Euro. We use derivative financial instruments to mitigate these risks. We do not use derivative financial instruments for speculative or trading purposes. We generally enter into monthly forward contracts to reduce the effect of fluctuating foreign currencies on short-term foreign currency-denominated intercompany transactions and other known currency exposures. The average notional amount of such contracts was approximately $0.6 million and $1.8 million, respectively, for the three months and nine months ended September 30, 2008. On September 25, 2008 we entered into two forward contracts for the month of October with a total notional amount of approximately $3.5 million. The fair values of these contracts at inception were zero, which did not significantly change at September 30, 2008. We do not anticipate any significant future loss from fluctuations in currency exchange rates, as our hedging strategy is designed to minimize the risk of such fluctuations.

CONF CALL

Debra Wasser

Thank you all for joining today's call. I'm Debra Wasser, Veeco's Senior Vice President of Investor Relations. Joining me today are John Peeler, our Chief Executive Officer, and John Kiernan, our Senior Vice President of Finance and Corporate Controller. Unfortunately, due to a death in the family, Jack Rein is unable to join us for today's conference call.

Today's earning release was distributed at 4:00 p.m. this afternoon and is available on the Veeco web site. Also posted on our site is a Power Point overview of our fourth quarter financial results. The slides include all financial results, detailed business segment information and forward-looking models related to our restructuring plan.

If you haven't already received a copy we encourage you to visit the web site or call my office. This call is being recorded by Veeco Instruments and is copywrited material. It can not be recorded or broadcast without Veeco's express permission. Your participated implies consent to our taping.

To the extent this call discusses expectations about market conditions, market acceptance and future sales of the company's products, future disclosure, future expectations or otherwise make statements about the future, such statements are forward-looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from the statements made.

These factors are discussed in the business description and management's discussion and analysis sections of the company's report on Form 10-K and annual report to shareholders and in our subsequent quarterly reports on Form 10-Q, stock reports on Forms 8-K and press releases. Veeco does not undertake any obligation to update any forward-looking statements including those made on this call to reflect future events or circumstances after the date of such statements.

During this call management may address non-GAAP financial measures. Information regarding such non-GAAP financial measures including reconciliation to GAAP measures of performance is available on our web site. I'd now like to turn the call over to John Peeler.

John Peeler

Thank you all for joining us today. I'm pleased to report that despite the challenging market environment, we executed on our plans to refocus Veeco, grow revenue and improve profitability, and our Q4 and 2008 results were in line with guidance.

We have swiftly implemented a restructuring program to transform the company to a simpler, more cost effective structure and lower our break even with a goal to return to profitability by the fourth quarter. I'm confident that we are creating a scalable operational model, capable of delivering better than 15% EBITDA when the market recovers.

During 2008, Veeco increased revenue 10% to $443 million from $402 million in 2007. We grew the company without increasing operating spending and drove 163% increase in EBITDA to0 $28 million versus $11 million last year.

We generated cash and paid down debt to significantly improve our balance sheet. We also delivered on our commitments to street every quarter. We made good progress in 2008.

We grew revenue in our LED and Solar business by 43% to $166 million, making this our largest and most profitable segment. We secured new customers for MOCVD and gained traction with our K465, increased R&D investments by 38% and grew our solar revenues to over $40 million.

We realigned our data storage business by consolidating overhead and locations and increasing outsourcing while at the same time, maintaining alignment with our customers' technology roadmaps and this resulted in a 10% increase in revenue to $149 million and a significant improvement in profitability.

In Metrology, while revenues decreased by 15% primarily due to the challenging semi-conductor market, we've refocused the business with new leadership to execute an operational turn around.

I'm also encouraged by Veeco's progress in 2008 to strengthen our organization and increase effective across the company in areas such as product development, manufacturing and sales. For the fourth quarter, despite the extremely challenging market environment that necessitated a significant impairment charge, Veeco's results were in line with guidance.

Fourth quarter revenues were $110 million and non-GAAP EPS was $0.11 per share. Due to a strong free cash flow of over $19 million, we significantly improved our balance sheet during the quarter. Veeco retired $37 million of convertible debt and our year end cash balance stands at a healthy $104 million.

By business, Q4 in LED and Solar revenues were $38 million, up 12% versus the prior year. Data Storage revenues increased 21% to $45 million and Metrology reported revenues of $28 million, down 23% from the prior year.

Veeco's fourth quarter 2008 bookings were $89 million; stable compared to the third quarter of 2008 despite a 57% decline in data storage bookings. Data Storage bookings were $14 million which is a historically low level for Veeco. Our key customers froze capital spending and placed no systems orders. We believe this order rate of spare parts and service represents a trough level.

LED and Solar orders increased 69% sequentially to $44 million including record orders for our MBE systems for solar and other emerging applications. Strong orders for thermal sources from six solar companies and two large multi-unit MOCVD orders from LED and concentrator photo-voltaic customers.

Metrology bookings were down 4% sequentially and while we're seeing relatively stable conditions for industrial and research markets, Metrology continues to be negatively impacted by extremely weak conditions in the data storage and semi conductor markets.

While the booking rate in the fourth quarter was relatively flat compared with the third quarter, overall business conditions deteriorated during the quarter. In particular, LED and data storage customers pushed out approximately $30 million of revenue from the first quarter of 2009, and as a result we anticipate a very weak start to the year with first quarter revenues and booking below Q4 of '08. Nearly half of our $147 million in backlog is currently forecasted for the second half of 2009 revenue.

As we indicated on our October earnings call, during the fourth quarter we began to implement a series of corrective actions in light of the overall business decline. Our aggressive restructuring plan is designed to significantly lower our quarterly break even revenue level to $80 million with a goal to return the company to profitability by the fourth quarter of 2009.

We've implemented a 26% reduction in force and 70% of those reductions will be completed by the end of the first quarter, and remaining impacted employees have been notified and will exit the company at various times during the year in conjunction with specific manufacturing initiatives. The head count will decrease from 1,318 on September 30, 2008 to below 1,000 by the end of 2009.

The sizeable work force reduction is being achieved by organization changes that centralize Veeco's supply chain and operations under new leadership, consolidate business units, increase outsourced manufacturing and decrease the number of manufacturing sites from eight to four.

Some of the more significant organizational changes are as follows: a combination of our auto AFM and Nano Bio AFM businesses into a single business, this eliminated a significant number of applications in R&D and marketing positions.

Going to full outsource models for our data storage slider product line by June, and MOCVD systems by the end of the year. Consolidating our ion source components manufacturing within our systems manufacturing sites. Reductions in our sales and services organization and relocating to more cost efficient offices in France and Japan.

We also significantly reduced our finance, HR and other administrative groups in light of the new organizational structure.

Other key cost cutting actions included senior management pay cuts. I've taken a 15% cut and other Veeco executives are taking 7% to 10%, dependent on their level, decreased Board of Director compensation, employee wage freezes and significant decreases in discretionary spending such as travel, IT, Telecom, supplies, consultants, and other items.

We estimate that the restructuring programs will result in annualized savings of over $36 million. These savings include a $20 million reduction in manufacturing labor and overhead and service costs which are included in cost of goods sold, and a $16 million reduction in operating spending.

Before I comment further on our outlook, I'll hand the call over to our Corporate Controller, John Kiernan, who is substituting for Jack Rein today.

John Kiernan

I will start with a review of Q4 '08 results. Sales for Q4 '08 were $110.3 million, up $3.5 million or 3% versus Q4 '07 and met guidance. The increase was primarily due to 21% higher sales in our Data Storage business and 12% higher sales in our LED and Solar business. LED and Solar included a 50% increase in MBE products as well as $7.9 million in revenues for our solar web coders.

Partially offsetting this was a 23% decrease in Metrology sales due to weakness in semi-conductor, scientific instrument and data storage. Orders for Q4 '08 were $88.5 million down $26.4 million or 23% from Q4 '07. Veeco's book to bill ratio was .8 to 1 for the quarter.

Veeco's backlog as of December 31, 2008 was approximately $147.2 million, down $28.8 million from September 30, 2008. Backlog adjustments in Q4 '08 totaled $6.9 million including $4.9 million from order cancellations and $2 million from changes in foreign currency rates.

Overall gross profit for Q4 '08 was $40.2 million or 36.4% of sales compared to $35.7 million or 33.4% of sales for Q4 '07. Purchase accounting adjustments related to our acquisition of Mill Lane as well as inventory write offs in our Metrology associated with the decline in demand for Legacy semi-conductor products adversely impacted Q4 '08 gross profit by $3.5 million, or 3.1 margin points.

LED and Solar gross margin declined to 35% from 39.8% in Q4 '07 which includes the Mill Lane purchase accounting impact of 1.5 margin points. The gross margin reduction was also attributable to a 33% decline in MOCVD sales.

Metrology gross margins declined to 25.8% from 39.3% in Q 4 '07 which included an inventory write off in Q4 '08 of $2.9 million, or 10.5 margin points associated with the auto AFM semi-conductor product line. In addition, the Metrology gross margin was also attributable to lower sales volume.

SG&A for Q4 '08 was $22.2 million, or 20.1% of sales compared to $21.6 million or 20.2% of sales in Q4 '07. The dollar increase was primarily due to an increase in bonus and profit sharing as a result of increased earnings, partially offset by a reduction in travel and other personnel related costs consistent with the company's continuing initiatives to reduce spending.

R&D expense for Q4 '08 totaled $15.2 million an increase of $.3 million from Q4 '07. The increase was primarily due to our research efforts related to our MOCVD product enhancement and next generation tool development as well as investment in our web coders.

Amortization expense totaled $3.2 million in Q4 '08, up by $1.2 million compared with Q4 '07 due to the amortization of intangible assets associated with the Mill Lane acquisition.

In Q4 '08, the company recorded an asset impairment charge of $73 million for good will and other long lived assets associated with our Data Storage and AFM businesses. While the company did not have impairment at the October 1, 2008 annual test, a second test was necessitated at year end and due to the significant decline in Veeco's market capitalization, along with a weakened business environment.

In addition, a restructuring expense of $3.6 million was incurred which included $2.5 million in personnel severance costs and $1.1 million in lease commitments.

In November 2008 the company repurchased $12.2 million of its convertible subordinated note due April 2012 at very favorable pricing of $7.1 million. As a result of this repurchase, the company recorded net gains from the earlier extinguishment of debt of approximately $5 million.

Q4 '08 GAAP net loss was $72 million or $2.29 per share compared to a net loss of $9.4 million or $0.30 per share in Q4 '07. EPS excluding certain items and amortization expense and using a 35% tax rate was $0.11 in Q4 '07 compared to $0.07 in Q4 '07.

I will now review full year 2008 results. Sales totaled $442.8 million, a 10% increase from 2007. Orders were $424.4 million declining 6% from 2007. The book to bill ratio for the year was .96 to 1.

Gross profit for the full year 2008 was 39.9% compared to 39.1% in 2007. Strong performance in both our LED and Solar and Data Storage business due primarily to an increase in sales volume and favorable mix was partially offset by the effect of 15% lower sales volume in Metrology.

Operating expenses increased $1 million compared to 2007 primarily due to a $7.4 million increase in bonus, profit sharing and equity compensation expense, $1.6 million of increased spending for our web coder business and $2 million of project material.

Offsetting these increases were reductions of $3.2 million in consulting costs, $3.1 million in travel and entertainment, $1.5 million of salary and fringe and $2.3 million of insurance facilities and other costs.

During the full year 2008, the company recorded charges of $83.8 million. As previously discussed, $76.6 million of these charges were incurred during Q4 '08.

Veeco's 2008 GAAP net loss was $71.1 million or $2.27 per share compared to a net loss of $17.4 million or $0.56 per share in 2007. EPS excluding certain items and amortization expense and using a 35% tax rate was $0.51 in 2008 compared to $0.17 in 2007.

Turning to the Q1 '09 outlook, due to the significant deterioration of the overall economy and credit availability for our customers, our trailing six month order rate decreased 27% compared to the first six months of 2008. In addition, customers have delayed $30 million of shipments from Q1 '09 to later in the year.

As a result, Veeco's currently forecasting Q1 '09 revenues to be in the range of $60 million to $70 million with gross margins in the 33% to 36% range. Q1 '09 operating expenses are currently forecasted to be approximately $33 million to $34 million down from $37.4 million in Q4 '08 due to our restructuring activities. Q1 '09 restructuring charges are expected to be in the range of $5 million to $6 million.

Excluding these charges, amortization expense of $1.8 million, equity compensation of $1.7 million, non cash interest of $.7 million and using a 35% tax rate, Veeco's Q1 '09 loss per share is currently forecasted to be between $0.25 and $0.17 on a non-GAAP basis.

We believe this new EPS measure excluding equity compensation and non cash interest more accurately reflects the way we will manage the company's performance going forward.

With respect to our balance sheet, cash and equivalents totaled $103.8 million at December 31, 2008. Free cash flow for the year was a positive $31.5 million.

Accounts receivable declined $12.3 million sequentially and DSO's for Q4 '08 were 49 days, down from 56 days at Q3 '08 and well below the industry average of 69 days. During Q4 '08 inventory declined $10.7 million to $94.9 million with a turn over of 2.8 times.

Capital expenditures were $2.4 million for Q4 '08 and $12.8 million for the full year. Depreciation expense totaled $3.4 million in Q4 '08 and $12.9 million for the year. In Q4 '08 we made significant progress in reducing our outstanding debt by $37.4 million. In the past two years, we've reduced our outstanding debt from $204 million to $109 million, a 47% reduction.

We've maintained a cash balance of approximately $104 million while completing a cash acquisition of Mill Lane. We feel this is a strong indication of the cash generation power that the company has.

I will now turn the call back over to John.

John Peeler

Clearly Veeco's financial results for the beginning of this year will be poor. However, we believe that our restructuring activities have the potential to dramatically improve our future performance. We expect that gross margins will improve to the 41% to 42% range at the $80 million quarterly revenue level and can go higher than 43% with a revenue north of $90 million.

With all of the restructuring activities factored in, plus a full end market recovery and revenues in the range of $110 million to $120 million, we believe that we could see gross margins in the range of 45% to 46%. And for comparison, in Q3 '08, we reported $116 million in revenues and 41% gross margins.

Obviously future gross margins will depend on mix and other factors, but this should serve as a guideline for what we're trying to accomplish.

While we are dramatically changing the organization and cutting spending in 2009, we're continuing to fund R&D programs with particular focus on high growth opportunities in LED and Solar, and new applications for Metrology instruments.

In LED and Solar, we'll remain focused on growing a profitable equipment business in green technology. Despite the current pause in capacity spending, we anticipate strong multi-year MOCVD growth tied to further adoption of LED's for applications such as TV's and laptops.

We continue to deliver MOCVD cost of ownership and uniformity improvements designed to increase yield and decrease our customers' cost per wafer. Veeco's MOCVD also offers a seamless transition to larger wafer sizes which is more important than ever for customers focused on maximizing their capital investments, and we think this potentially is a significant competitive advantage for Veeco.

We're also making meaningful investments in our CIGS' Solar business and engaging potential new customers for our integrated CIGS product solution. Veeco's solar growth strategy is based on building an integrated equipment offering for CIGS bend film solar cells which is emerging as the next generation low cost, high efficiency solar technology.

While the timing of new orders is in question in this environment, we're working with key CIGS solar manufacturers' world wide to understand their technology roadmaps and equipment requirements.

In the first half of 2009 we'll expand our CIGS solar product line to include a new glass deposition system. We believe there is a several hundred million dollar equipment opportunity in CIGS vacuum deposition equipment.

Our Metrology leadership team continues to focus on operation excellence and is making great progress in quality improvement, material cost reduction, contract manufacturing and supply chain management.

In our AFM business, we're rationalizing and repositioning our product lines, and in our Optical business we see expansion opportunities in industrial markets. Last week we launched our new Dimension Icon Research AFM platform which we see as a very significant new product for Veeco.

It's our goal to emerge from this downturn with a strong product portfolio that is well aligned to our customers' technology needs and exciting multi-year growth opportunities in LED and Solar, a solid balance sheet, and a leaner more cost effective organizational structure that can achieve 15% EBITDA when the end market conditions improve.

Thank you for your patience during our prepared remarks. We would now like to start the question and answer session.

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